The WSJ Debate

We hear a lot about the vital role of small business in the U.S. Especially in election years.

But that raises the question: How vital is the role of the federal government in promoting the role of small business in America? And specifically, how vital is the Small Business Administration in that promotion?

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The Wall Street Journal

The SBA's supporters argue that it plays a crucial role, guaranteeing billions of dollars in loans for small businesses each year and providing an army of counselors and information resources for those who need help. It particularly focuses on those who, some say, have been failed by conventional lenders.

But the SBA's critics say that the agency's loans do more harm than good. The loans go to only a tiny fraction of the small businesses in the country, for example, and help the recipients compete with small businesses that aren't similarly subsidized. Thus, instead of playing a crucial role in the U.S. economy, the critics say, the agency really is directing resources where the market has determined they aren't needed.

Yes: It Is a Waste of Money

By Veronique de Rugy

Congress created the Small Business Administration in 1953 to fix a specific problem: Lenders allegedly were turning away large numbers of small businesses that, if given a loan, would generate untapped economic growth.

It is questionable whether this problem ever existed. However, there is plenty of evidence that today the SBA hurts more small businesses than it helps, wastes taxpayer money and distorts economic activity.

The SBA's main activity is to provide government-backed loans to qualifying small businesses. In fiscal 2011, the agency requested $1.5 billion in discretionary outlays. However, total outlays, which include projected payouts for defaults, were $6.2 billion. In the past, requested outlays were closer to $1 billion. Also, the gap between that request and actual outlays used to be much smaller, but the agency has suffered increased losses in recent years on its guarantees. How this trend will evolve depends on the economy and whether default rates on SBA loans continue to increase. Currently, outstanding loans guaranteed by the SBA—and federal taxpayers—total about $92.9 billion.

Negligible Benefits

For all that real and potential cost, the SBA's effect on economic growth is negligible at best. The problem is that SBA loan guarantees go primarily to businesses that have been rejected by conventional lenders, businesses judged by private investors as unlikely to create jobs, marketable innovations or new economic productivity. The SBA wrongly assumes that every high-risk borrower has the potential to succeed.

One might argue that such risks are justified, because the SBA is an important source of small-business lending. However, the loans it guarantees benefit a relatively tiny number of firms. According to the Government Accountability Office, the SBA flagship loan program accounts for only a little more than 1% of total small-business loans outstanding. So, for the most part, SBA loans help a fraction of small businesses compete with unsubsidized small firms.

The agency does indeed run other programs, typically with results as unimpressive as its loan activities. There have been instances of poor oversight, for example, of its preference programs intended to carve out a percentage of federal contracts for small and disadvantaged businesses. The SBA also offers some training, technical assistance and "know-how" courses, but this should not be the role of the federal government, and it isn't needed. The private sector is already providing such services through private associations like the National Federation of Independent Businesses.

The SBA loan program is best understood as a subsidy to banks. Borrowers apply to an SBA-certified bank. The SBA guarantees 75% to 85% of the value of loans made in the flagship program. The banks then boost their earnings by selling the risk-free portion of the loans on a secondary market. Ironically, it's also the biggest banks that do the most business through the SBA.

The SBA and its proponents constantly talk about how the types of firms they serve are vital to job creation. But the latest research argues it's younger businesses, not small ones, that drive employment growth. The data show that real job creation doesn't kick in until the new/small businesses survive and grow into larger operations.

SBA proponents dismiss the research, saying young and small businesses are one and the same. It is true that most new, or young, firms start out small. But the ones that end up creating huge numbers of jobs don't remain small for long.

Take your corner pizza restaurant. In 20 years, it may still employ only a dozen people. It won't be young anymore, but it will still be small and it will never be a source of job creation like the SBA touts as part of its mission.

Seen and Unseen

More than 150 years ago, French economist Frederic Bastiat noted that many economic fallacies persist because the beneficiaries of government actions are easily visible, while the victims are harder to identify. The SBA is a classic example. Small-business owners who get subsidized loans feel good (so do the banks that profit from the loans), but we can't identify how that capital would have been used absent government intervention. We can count the jobs created at the subsidized businesses, but we don't know how many more jobs might have been created if market forces determined the allocation of capital.

That's the economic analysis. The political analysis is that politicians have successfully sold the SBA as a program to help small business—a widely held belief that's almost as sacrosanct as baseball, motherhood and apple pie. In reality, the SBA is a form of corporate welfare, and America's biggest banks are the only clear winners, leaving taxpayers on the hook for billions of dollars.

Ms. de Rugy is a senior research fellow at the Mercatus Center at George Mason University. She can be reached at reports@wsj.com.

No: Its Role Is a Crucial One

By Barbara Kasoff

Small businesses created two of out three net new jobs in the U.S. from 1993 to 2009. About half of the people who work in this country are employed by a small business.

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Barbara Kasoff: 'Now is not the time to eliminate' such a vital resource for small companies.
Women Impacting Public Policy

With unemployment still over 8%, now is not the time to eliminate one of the most important resources available to America's job creators.

The power of the SBA isn't just measured by the number of loans it makes. The Small Business Administration helps keep capital, contracts and know-how flowing to small businesses. In fiscal 2011, the agency guaranteed $30.5 billion in loans to about 61,000 companies, helped small businesses win nearly $100 billion in government contracts and mentored one million entrepreneurs through its network of business counselors, such as the 13,000 volunteers of Score, a nonprofit association of business counselors.

Through its Small Business Development Centers, Women Business Development Centers, and similar facilities that help minorities, women, veterans and other business owners, companies of fewer than 500 employees can learn about marketing and forecasting, and how to navigate the federal contract system. Some 14,000 counselors and trainers, including Score volunteers, help entrepreneurs get started and help established owners take their companies to the next level. The training resources are mostly free and are delivered in person or through a variety of media.

Aiming for Success

Such training gives these businesses the greatest possible opportunity to succeed. The SBA further collaborates with many private nongovernmental organizations to offer additional training, resources and technical assistance.

Even if the number of loans made by the SBA is relatively small, the aid goes to some of the most important, and most in need, sectors of our economy. In a 2009 study, the Urban Institute found women and minorities were three to five times as likely to get a loan through the SBA as they were through conventional lending.

I spoke recently with a woman in Tennessee who, after failing to get bank loans to launch a small manufacturing company, obtained an SBA loan within 45 days. Now, a year and a half later, she is preparing to meet with SBA counselors to expand her business and begin exporting her goods. She has two employees and several contractors, and is looking to hire.

Women and minority business owners play a substantial role in our economy already, but could contribute so much more. Get rid of the SBA, and they will contribute so much less.

The argument that SBA loans are given to applicants with poor plans and prospects, as judged by the market, misses a key point: The market too often is misjudging the viability of many of these businesses. Research shows women start their businesses with less capital than men, and there's a widespread perception that it is harder for women- and minority-owned businesses to get loans from financial institutions than it is for similarly qualified white men to get loans.

This isn't because women-owned businesses are less likely to succeed; it's because the market mistakenly perceives they are less likely to succeed.

Critical Advocate

The SBA is an advocate for small businesses with lenders at all times, but its role is especially important during economic downturns, when the squeeze on commercial credit can disproportionately affect small businesses. The SBA played a key role in arguing for policies to force the nation's biggest banks to resume lending to small businesses after the financial crisis hit in 2008.

The agency also worked closely with community banks to encourage more lending during the recession, and recently worked with 13 of the largest banks in the U.S. to increase their commitments by $20 billion over the next three years.

President Barack Obama recently elevated the SBA to a cabinet-level agency. Making SBA Administrator Karen Mills a cabinet member gives small business a seat at the government decision-making table like never before.

Those who wish to abolish the SBA cite research that makes the puzzling assertion that it is young businesses, not small, that drive job creation today. I doubt that any small business will understand this argument. Small and young businesses are one and the same. Small businesses employ about one-half of U.S. workers. Of 120.6 million nonfarm private-sector workers in 2007, small firms employed 59.9 million and large companies 60.7 million. About half of small-business employment is in second-stage companies (10 to 99 employees), and half is in firms 15 years old or older.

For our economy to grow and to become competitive again, we must increase our investment in our people and our resources.

Ms. Kasoff is president and chief executive of Women Impacting Public Policy, a public-policy organization based in Washington, D.C. She can be reached at reports@wsj.com.

The Readers Weigh In: The SBA's Fate

Should the Small Business Administration be abolished? Here's a sampling of comments from a WSJ.com poll.

As a small-business owner who used the SBA when starting out, I say absolutely not. Entrepreneurship is on the rise for many Americans. We all know the success and survival rates are low so every little bit of help…helps.

Kimmy Anstine Henderson

My 40 employees would not have jobs today if not for the SBA.

Andrea

We can't have huge expensive government agencies just because they do some good. A cost analysis of all such programs needs to be measured against economic benefit, and old bloated bureaucracies like the SBA should be either cut back or eliminated.

Keven Belt

After more than a decade making SBA-guaranteed loans in Colorado, I personally know of over a hundred businesses that were critically helped. Most of them could not get a conventional bank loan at the time they obtained an SBA 7a or 504 loan. Most have thrived, and now are highly credit-worthy. In terms of bang for buck, I don't think there's a more efficient government agency.

Sean Avery

Small town America would be hard hit with the elimination of the SBA. In rural Alabama an 81-year-old business was just able to restructure debt and retool its production plant. The result is that 63 jobs were saved with an average annual payroll of $2.4 million in a town with a population of 14,521.

Dana Moore

No, it shouldn't. I was just on their very helpful, interactive website today, so no!

Teresa Miles Hendrix

Reform it and every other government agency. We need a high rate of return for each dollar the government spends.

John Boyd

I know, we can all go back to making candles, home schooling, farming our own land, and butchering our own animals—all by ourselves with no help from the community at all.

Samantha Parrington

My career in commercial lending relied heavily on SBA financing, so I am a strong proponent of the SBA. However, I am also a strong believer in streamlining government programs by consolidation and saving tax dollars. The SBA and a multitude of other government-operated business financing programs could be housed under one department.

Fred Hashley

Show me where the founding fathers intended for the government to assist certain businesses at the expense of all taxpayers.

Zach Jones

Robbing Peter to fund Paul? Spin it off as a nonprofit, let it thrive or perish as it has to persuade donors instead of politicians.

Taylor B. O'Neal

The SBA should be abolished. I was prepared with 6 months of living expenses, but it took 14 months for me to receive the loan. I would have been bankrupt without the compassion of my local bank. I later went back to the SBA for support in expanding my business. That was a complete waste of time. A private investor assisted and we opened our second location. We are a successful small business, we create jobs. I will never recommend the SBA.

If you think the SBA is an inefficient waste of resources you should look into the FSA, Farm Service Agency. The FSA also does guaranteed lending thru banks for farmers. They are incredibly inefficient and inbred. I am a rural banker and know of no bankers who will use them. I have no idea why they still exist. There are so many government agencies that need to die but just hang around sucking tax money.

I am an advisor and help run a vibrant branch of SCORE in eastern Pennsylvania. It is very misleading to imply the resources of 13,000 volunteer SCORE advisors nationally are part of the SBA. While SCORE receives some funding from the SBA, this is mainly in support of the SCORE national office in Washington DC. We do coordinate and cooperate with the local SBA office in support of small businesses we work with. However, SCORE would certainly continue to operate with no support from the SBA; only a very small portion of resources used at the local chapter level are provided indirectly from the SBA. As a volunteer organization, most resources are provided by SCORE members who volunteer their time to counsel clients as well as operate the organization; even considering cash resources the vast majority is provided by local sources including county and local governments, private sector sponsors, private donations and fundraisers.

The reality is that the vast majority of businesses in start up phase are unable to utilize SBA loan guaranty programs as lenders are generally interested only in businesses that have a successfull track record and have built up assets to provide collateral. The SBA programs can be useful in assisting existing, successfull small businesses expand. I would note that many of the SBA personnel I have worked with are very capable and knowledgable, and work hard to provide assistance to small business persons via workshops and other resources. However, I agree with the point of view that the SBA loan programs are not really necessary- I believe most loans that obtain SBA guaranty support are of sufficient credit quality that they would probably be approved by the underlying lender if there was no guaranty program. Thus it's a reasonable conclusion that the SBA program effectively serves mainly to subsidize large lenders.

Obviously neither of the writers of these articles have ever made an SBA loan or started a business. A few key points which make this debate a very easy one. First, SBA loan guarente recipients pay for the guarente, up to 3% of the entire loan balance to fund the losses that are incurred by others who are not successful. Secondly, no person ever created wealth by simply saving money. It's virtually impossible to do with out owning something and being able to build equity. Regardless of how many new jobs are created, entrepreneuers are grown from those willing to take risk, work hard and long, and stick with it. The SBA is not a replacement for collaterial, but rather a shoring up of risk for the lender. No government dollars actually are given to the borrower, rather the government guarente is there to back the investment. Thirdly, SBA loans are not a unfair subsidy, rather they are a Safety net for the lender and borrower to venture into a business that is not propped up with investor capital. Remember, the investor had first dibs on investing, and when they don't, the business equity creator/ owner can own more of the business, create wealth, and jobs through the SBA.

Again it is apparent that neither of the contributors to this article have ever made, sold, and participated in an SBA loan because most business owners see it as a negative in the business world that your"had" to get an SBA loan. They should see it as I got and SBA loan to allow me and my bank ( notice I didn't say credit union) to ride the tide of good and bad times in my business and be able to re-capitalize should hard times come about.

it is very funny that all the people who are against SBA is against it for political reasons... i bet most of them never start a business and raise money... it is unbelievable that with all other government waste we discuss abolishing SBA... go abolish post office... unbelievable...

When the advocate for the SBA says that agency helped small business obtain $100 billion government contracts it is obvious it serves as a conduit for political favors. Get rid of this and most other government monsters. It also becomes clear the banks profit more than small business. Small business start-ups have a high failure rate and they need to survive on their own, not end up being another small-sized Solyndra.

I really don't know how you could even get rid of the SBA if the nation thought it was the best route. The market is so dependant on it. It would be like if all residential lenders just came out one day and said the max loan to value is 80% - period. The real estate market would fall apart.

I beleive in tough love :) but that would be brutal on the commercial real estate business. A lot of money would be lost. And yes Im in the business and close SBA loans.

What needs to be stated over and over again are three factors that prove the SBA plays a vital role in our economy and, if anything, should be enhanced

1. SBA lending programs are self-funded by users. This cannot be overstated. For everyone bleating the mantra about smaller government, not subsidizing the "worst" borrowers (more on that to follow), etc., you need not worry about those things, because for a number of years now, SBA lending has been self-funded. It's called zero subsidy: fees charged on the loans cover the budget associated with guaranteeing them.

2. SBA loans are made to credit worthy, eligible borrowers who require a term longer than a very conservative credit market is willing to go. Banks want working capital loans repaid in very short time spans, often as little as 30 days. SBA bridges the gap between what the market is willing to do and what the borrower needs to be successful.

3. In recessionary or slow-growth periods, the SBA is needed more than ever. The risk/reward tradeoff seen in normal times is greatly skewed due to low margins, borrowers having had previous hiccups, and an overbearing regulatory environment. While most commercial lending atrophied in 2011, SBA had a very strong year. This does not mean the lender does not have to do proper underwriting, and as a result ( no doubt generating some of the previous comments about how SBA is "useless"), a large percentage of borrowers are declined. However, enough are made to pump billions of dollars into the economy and create thousands of jobs. Assuming that a risk averse free market would have done the very same thing is, at best, naive.

With the SBA's programs under zero-subsidy, where is cost to the U.S. taxpayer? If you don't like paying for the SBA, don't apply for one of its loan products.

As Bastiat commented, you can see and count those who benefitted. But where did the money come from? How many other small businesses did NOT start or failed because of the taxes levied to pay for the SBA handouts along with its overheads and bureaucracy?

They've just counted 40,000 small businesses lost in South Africa last year to government taxation and regulation...

I have been a lender to small business for over 30 years now (Continental Bank, LaSalle Bank , Great American Leasing Company and now Cobra Capital my current firm). I am intimately familiar with all of the past SBA loan programs. In my entire 30 year history of attempting to process SBA loans through both the Preferred Programs and non-Preferred loan programs I have this final conclusion:

The SBA remains a very difficult, onerous and painfully long process. I can give you numerous examples of local small businesses who have waited up to 12 months for an approval at which point it becomes meaningless as either they have already had to lay off staff, missed a business opportunity to buy a company or a property or in few cases never were able to get the working capital needed to finance their inventory and have since had to sell their business to the competition or in some cases actually close their otherwise viable business.

The bigger picture problem lies within the SBA’s defunct origination system, our failed banking system. The SBA primarily relies upon the banks to originate and process the small business loans. Many of the community banks have failed or remain so undercapitalized that they are unable to properly staff SBA functions within their own banks. The nations big banks are really no better relatively speaking. Just drill down on the JPMC and BofA small business lending numbers as a percent of their total assets and you will get a very depressing number – less than .10% - that’s point 10 percent – not 10% or even 1%. NO – POINT 10 PERCENT!

I have done many hours of pro-bono work on behalf of small business and have contributed my time to go on Bloomberg Radio and TV, (go to our News & Articles page of our website www.cobrallc.com for my taped interviews), to discuss the banking crisis impact on small business credit which our firm identified in 2007 before the banking industry was even willing to discuss it (the Editor of the American Banker insisted we were wrong in December 2007 that it was a temporary aberration and that the banking industry “was just fine”).

After many hours of debate on this subject both on and off air with some of the most knowledgeable people, I am convinced that the most beneficial means to restore critically needed credit in this continuing credit freeze on small business is to re-instate the depression era Reconstruction Finance Corporation (RFC) which was highly successful because it funded small business directly through its channel of funding programs. It succeeded because it intelligently by-passed both the stingy zombie banks and the beauracratic SBA. Even Carnegie Mellon’s Professor Marvin Goodfriend suggested this RFC as alternative to today’s zombie banking system. While I firmly believe that government subsidized programs have mostly failed in the past, he made me realize that the RFC actually did work and it solved the depression era small business credit freeze and greatly helped create jobs.

Please keep this suggestion in mind for your future discussions on this important issue. I would be happy to contribute to your efforts in this regard if necessary. Without fair and reasonable small business credit, we will not have any meaningful jobs recovery anytime soon.

I think the SBA is largely impotent as an organization relative to the impact it provides. However, why the extreme position of abolishing it? Are we so easy to quit on an institution designed to support an important arm of our nation's economic infrastructure?

My view is that the SBA should be placed neatly on a performance treadmill, while listing the exact small businesses it has helped, with corresponding results on its websites. It also needs to hire Business Consultants who go to different locations of our nations, acting as venture capitalists, while seeking out small businesses to assist and expand, on behalf of tax payers. The SBA needs to be pro-active and not reactive. Abolishing the SBA, is too extreme a position. The SBA still has its uses.

The lending process for SBA loans is structurally flawed. The banks perform all of the credit analysis and effectively make the lending decision. With minimal and incompetent staffing, the SBA grants a 75%-90% loan guarantee if the forms are fillled out properly. The lending decison by the banks is driven by the ability to lay off most of the risk to the Federal government. Does that sound familiar? Joe McKee, Tucson

Ms. de Rugy's arguments are invalid. First, she doesn't make any clear distinction between the various loan programs administered by SBA. Is she referring to the Micro Loan programs, 7(a), or 504? Is she referring to other programs administered under 7(a) rules like the Express Line? By her generalization of the guarantee percentage, I would have to understand she is referring to the 7(a) and Micro Loan programs.

Second, she doesn't state whether or not that 1% of loans are total loan volume (i.e., total number of SBA loans made in a particular period versus total number of commercial/ traditional bank loans) or dollar volume (i.e., total dollar amount of SBA loans versus the total dollar amount of all other business loans). That said, to be credible, she should clarify her comparison by market segment using the criteria established by the SBA. Loans to businesses on the size of revenues and/or total number of employees, to be sure she's actually comparing apples to apples. If she's looking into real estate transactions, then she needs to make her judgment based upon the criteria of the 504 loan program - tangible net worth and two years net profit after taxes - to see where the majority of loans made in this country fall. If you look at the total number of SBA loans (dollar-volume) and compare it with the financing provided to a multi-national company, of course the numbers will be smaller. But that's not a legitimate comparison.

She clearly does not have any understanding of the SBA or its loan product offering. In fact, in reviewing her "analysis" I have to wonder whether or not she ever worked in commercial lending or small business banking in any capacity whatsoever (and writing about a topic for which one has no real experience or knowledge does not suffice).

She claims SBA loans go to "businesses judged by private investors as unlikely to create jobs, marketable innovations or new economic productivity. The SBA wrongly assumes that every high-risk borrower has the potential to succeed." If she were actually involved in lending to any degree, or had examined any SBA loans at-length, she would see that there are a great many borrowers qualifying for SBA lending that are anything but "unlikely to create jobs, marketable innovations or new economic productivity." In the past 10+ years I've been working with the SBA 504 program, I've had the opportunity to connect with some of the most brilliant individuals in business - some of the most cutting-edge innovators of our time.

How many Fortune 500 companies received financing because they were "judged by private investors" as being worthy, yet they laid off employees during this past recession, and have yet to return to pre-recession numbers of employees? Are those companies more worthy? How so? What marketable innovations has Frito-Lay made? What economic contribution does this company make when it has announced layoffs, but the financing this company received still far exceeds any loans guaranteed by the SBA? How is this entity more worthy than a small business that is growing and would benefit from either a 7(a) or 504 loan?

The fact is, the SBA program, when administered rightly, is an excellent tool for small businesses and Ms. de Rugy does not understand the program or methodology behind lending.

The following question, speaks volumes regarding the intent of the SBA critics: How vital is the role of the federal government in promoting the role of small business in America? And specifically, how vital is the Small Business Administration in that promotion?

Reading between the lines of these questions indicates the underling anti-government tone of the critic. It’s more that the SBA represents the federal government taking a role rather than the merits of the SBA versus the multi-nations getting a tax deferral on overseas income which over the last 15 years has decimated the U.S. domestic economy. The plank in the eye of the SBA critics, many if not most, defend the multi-nationals but vilify a resource to small businesses. It’s a case of form over substance, namely, tax spend advocated by Americans for Tax Reform (ATR) and The Club for Growth for the multi-nations/ non-national corporations versus traditional governmental spend for small businesses which the preceding organizations want to eliminate.

This is how government buys us off. The programs we use we like. Then we trade with somebody else for their programs. We might not use them or like them, but somebody else does, and we want them to support our program.

Each program seems affordable and reasonable--hey, it's not that much money. Somebody else's program costs a lot more. How about the military: I don't get much benefit from that; let's slash that.

Derrek, thinking like this is what has gotten us a $3.8 trillion budget with a $1.3 trillion deficit. You have exactly proved my point with your response. There are many, many things that we do not need the federal government to do for us, and that we are better off doing for ourselves. The federal government--not my ideology--is a one-size-fits-all solution to perceived problems. And they are always an expensive, inefficient provider.

The federal debt is approaching $18 trillion due to government overspending. There isn't enough income in the U.S. to tax people at a high enough rate to reduce that amount substantially. The only alternative is to cut spending...and it has to begin somewhere.

I know you think you are being reasonable and advocating for things government does well...but people like you are feeding the deficit and the debt. Tell me, please, where would you reduce government spending?

As to small businesses v. big, if you look carefully, you will see that government is actually the entity that prefers large business. It's easier for them to observe and regulate a few behemoths and to buy them off with special favors than to deal with many small businesses. It's also easier for them to collude together, as happened, for instance, in trucking and airlines before deregulation.

Take a look around the world; in those countries with the most government-dominated economies, there is always a cozy relationship between the government and big business. Who gets abused is you, me, and the other average guys who aren't on the inside of that game.

China: state-owned firms dominate. Russia: state-owned firms dominate. Throughout Western Europe: entrepreneurship is virtually non-existent and large firms dominate. French companies are run by rules promulgated by the government. Germany is the same.

Reading this article made me realize how poor journalism is in today's age. Veronique attempts to argue for abolishing the SBA without taking the time to really understand what is the intent of the SBA program.

Veronique states that only 1% of the total small business loans outstanding are SBA loans. This may be true but she fails to inform the reader that the SBA is a lender of last resort and SBA loans are intended for borrowers that are deemed non-bankable. This does not mean the borrower is not creditworthy, but I will explain that later. In regards to the "lender of last resort" statement, the SBA program incentivizes the lender to provide small business loans when the lender may not be willing to do by providing a guarantee to the lender for a significant portion (>=75%) of the loan amount. If all creditworthy borrower are eligible for a SBA loan (there is no "lender of last resort" clause), than all lenders will only want to provide SBA loans since a significant portion of their loans will be guaranteed. The result will be an increase in the amount of SBA loans oustanding nationwide which will naturally result in increased loan losses from non-payments (due only to increase in the quantity of SBA loans in the market) which will increase the amount of SBA guarantee payments on these loan losses from taxpayer money.

Now let me address the previous creditworthy comment. I will give a very simple example, an individual will like to open a small sandwich shop in his/her community. The individual has excellent credit, minimal personal loans and credit card balances outstanding, owns a home that has a mortgage. The individual worked as a Manager for a Subway store but now wants to open his/her own independent sandwich shop (hence, the individual has experience in the industry). Sounds great right! Experienced individual, excellent credit, minimal personal loans, has real estate but minimal equity on the real estate, and is looking for only $200K in a loan. Any bank will want to do this deal....now please find me a bank that will give an individual $200K loan for a startup without historical financials. And remember, this is a small sandwich shop so venture capital is not an option. If you could find a way for this individual to get a loan in any city in the US without having to tap personal credit cards than we do not need an SBA. If you can't, then you know my answer to the article's question.

More nonsense. Successful new businesses start all the time; they are not "crushed" by big players. Being small affords advantges. Loans do get made by banks and private capital invests in start ups. The question is: Should governmentI be in the business of decideing which small businesses get loans and which ones do not? Private lenders, with their own skin in the game, are better positioned to do that.

That's total nonsense. I have a female friend right now who is starting a new business with support and mentoring from a nearby university. Big fish don't need help from a local university. And what do Wal-Mart and Apple have to do wtih this?

After 25 years as a federal bank examiner and community banker, I can speak from personal and firsthand experience about small business lending and SBA loans. Bank examiners are excessively critical of any banking activity with fledgling companies who desperately need start up and growth financing. The SBA loan guarantee is one of the few means these companies to getting started.

As an experienced lender, I am proud of the number of SBA loans that I have completed for my clients. These companies had a good idea, product or service that had strong demand from valid customers and employ your neighbors today. A couple of examples of these include a baseball batmaker for MLB, a builder of non-technical specialized equipment for NATO special forces teams around the world, and one "mows" the forest in wilderness areas to keep forest fires in check should they occur. None would be in business without the SBA loan guarantee program. These loans were fully repaid on time and at little to no cost to taxpayers other than administrative costs.

Sure these loans take effort, a sound business idea, an effective business plan, good financial projections and creditworthy borrowers. But would you start a business without any of these?

Yes, the forms are material, but by no means as difficult as completing a tax return today. Any banker worth their salt should be expecting nothing less than what the SBA is going to require.

Bankers who say they aren't worth the effort are either lazy, wrong, or simply ignorant to the SBA Guarantee benefit. Borrowers who say they aren't worth the trouble are either not creditworthy or may lack that essential element that makes small business owners successful today . . . tenacity.

Though I usually prefer smaller government, I truly feel that the SBA is as critical to our country's business community as the Department of Agriculture is to our country's farms. Sure, do away with the SBA. But stop sending billions to farmers to NOT plant crops.

RE: WSJ headline: Should the Small Business Administration Be Abolished?

Should you bother trying to swat a fly when you're being swarmed by wasps? Abolish first the EPA, the Department of "Energy" and the US Fish and Wildlifte Service so private enterprise can exploit America's natural resources -- ALL of 'em.

Also abolish the dictatorial Executive Order. And rescind, oh, say, 40 or 50 years worth.

My daughter started a business 8 years ago (and is still growing) using and an SBA loan and discovered there was a never ending demand for paper work and updates to keep them happy. She had a five year loan but paid them off after two years to get out from under their constant demand for information. It may have been the office she was dealing with but the loan was not worth hassles she had to put up with. If you asked my daughter now, she would tell you to avoid the SBA completely.

Both con and pro writers have some things right and some things wrong. Although I spent 35 years as a business development officer at a number of small community banks, being retired I don't have a pony in this race. The big money center banks use the SBA 7(a) program in most cases to lend money to business entities when they would make the loan on conventional terms. The underwriting, packaging and closing a SBA loan is so cumbersome that developing new business is not cost effective; most if not all loans generated by the big money center banks originates from their existing customer base. On the other hand small community banks invest a great deal of capital to establish and maintain a SBA department.The trouble is with the agency itself and it's schizophrenic approach to issuing the guarantee: it supposed to be a cash flow lender; it turns out to be a pawn shop, nothing more than a collateral lender. This led to the ballooning of the defaults. As the collateral taken (i.e. residential real estate) collapsed as the cash flow disappeared the SBA wound up holding the bag.Most potential borrowers need money, not counseling; the agency keeps wasting money on something not needed. Also the SBA attempts to be a social engineering tool- which has nothing to do with business. Banks or the Government shouldn't be in the business to lend to poorly qualified minorities or women; lending should be strictly based on qualifications.The SBA shouldn't be eliminated- it should be reorganized from top to bottom, simplified, the big money center banks should be shut out of the process. Start with the firing of most if not all the present bureaucrats.

It is obvious Ms. deRogy hasn't spent much time out of her Ivory Tower! Tell me Ms. deRogy, have you ever lent money to a business? Most lenders actually do not sell their guaranteed postions in the secondary markets. Most banks, like mine, use the enhancement programs to assist borrowers by being able provide loan terms and structures that usually are not possible under exisitng bank loan policy requirements, which are dictated to the banks by the Feds. The 7a program acts as a critical part of relationship insurance for the borrower as well as the bank as it restricts the bad things a lender can do to a borrower who is struggling. Without the SBA, many companies would not survive. Or, we could just abolish SBA and drastically liberalize the Fed-mandated lending criteria and see how that works. I know because over the last 27 years, I have witnessed hundreds of jobs created by these programs and have run two SBA groups, including one that was a national Preferred Lender. People who have no experience (and thus knowledge) in corporate finance should really stick to pontificating on subjects they actually know.

In January I asked President Obama in a Google Plus Hangout - f the business organizations are consolidated as he proposes will the small business focus of the government suffer. http://www.youtube.com/watch?v=eeTj5qMGTAI -

I asked this as I DO THINK the SBA is important.

Sure it might need to be over hauled or reviewed, but overall the US Government NEEDS an agency and point person to lead its efforts to promote small businesses. The SBA does not only oversee loans but also backs and/or coordinates SCORE and SBDCS - two important off shoots of the SBA.

Another great organization is the privately funded StartUp America - which should in fact also collaborate with the SBA in some things. But overall, it is in the interest of the government to support and help small businesses and the SBA is one of the best ways (always needing improvement) to do this

There are critical errors here: citing SBA 7(a) loan stats, while ignoring other, arguably more helpful stats about SBA 504 loans. Lumping all SBA loans into the 7(a) category will naturally result in such distortions (504 loans do not get a 75% to 85% guarantees, nor have the historical default rate of 7(a)s, and they have historically operated at a zero-subsidy, even producing surpluses in many of the yrs. leading up to the Great Recession). I would think she’d know that by now -- her quest to abolish SBA is going on 4 yrs.

The difference between “requested outlays” & “total outlays” are due to some ill-conceived provisions in the “stimulus” act, & the fact SBA continues to fail at recoveries/collections. Over $2 Bn was “walked away from” in just the 504 program alone in the past 3 fiscal yrs. (worst yrs. for defaults), while a deaf ear is turned toward my suggestion of having CDCs more involved. This idea SBA loans always go to biz rejected by ordinary lenders, unlikely to create jobs, etc. is inaccurate on the surface & patently false as you dig in. With the 504, lenders must sign a form saying they won’t provide up to 90% loan-to-cost financing over 20/25 yrs. & fix the interest rate on a portion of the loan for 20 yrs. If you did those things as a lender, your regulators would massacre you. But, SMART small biz realize that 1/2 the down payment, longer terms, & a longer fixed period on their loan is much better for them than ordinary loans -- we finance many “bankable” biz as a result. This is borrowing in a sophisticated fashion, not out of desperation. Biz owners who do their research benefit; those that don’t have to settle for less competitive, ordinary loans.

While the #ers of SBA loans are low vs. overall population of small biz, this is more a result of poor marketing of the programs by SBA & lenders. Also, many myths/misperceptions still linger about SBA loans which results in too many small biz thinking SBA is a four-letter word. Her “young, not small biz drive job growth” argument ought to mean she’d support 504s, since these are made to more sophisticated & “healthier” borrowers wanting to buy their comm. property & equip. Moreover, all 504 loans require borrowers to sign, effectively, an affidavit attesting to the # of jobs to be created in the next 2 years. This is something I have never heard about in regard to any other government job-creation #ers. She since cites “corner pizza shop,” it’s important to understand we’ve financed many. Often times, it’s borrowers buying pizza shop #2 or 3… but I’m not sure how they open without creating additional jobs? Perhaps her French economist knows how better that works in theory?

If Ms. de Rugy is so concerned with corp. welfare, I suggest she turn her sights toward Big Biz, which disproportionally (about 98% of the “stimulus” dollars) got handouts when many small biz didn't. Without a fleet of lobbyists, small Biz just hunkered down, let employees go, & tried to weather the economic storm. Contrary to public perception, the small biz sector is so fragmented & large they rarely speak with 1 voice. This results in less TRUE support from DC than should be warranted. Sure, every politician says they’re “FOR” small biz, but when it comes to supporting legislation, it is much more likely for Big Biz to get their way. Most small biz owners are too busy putting out fires & running around with their hair on fire to concern themselves with the inequity/hypocrisy in DC.

With a Bn dollar budget (yet produces close to $30 Bn in loans each year – this alone proves its usefulness), I don’t know of another federal agency/department that does more with less than SBA. Abolishing SBA because of some minor programs that need reform would be like throwing the baby out with the bathwater. It’s time for her to turn her attention to other areas of govnmt to improve. Continuing to bash SBA is equivalent of stepping over dollars to pick up dimes.

Spot-On!!! SBA loans are NOT made to unqualified borrowers. To qualify for an SBA Loan the borrower must first be fully approved by a bank and their lending review board. The borrower must also have a 20% capital injection, near perfect credit AND assets that will guarantee the loan. The bank takes on 50% of the loan liability, the SBA 30%.

The SBA is an example of how government and the private sector can and should work together to advance job creation.

Walter, there you go again with the facts! Unfortunately you are wasting your time. These people are clueless as they have never worked in corporate finance. They don't understand how it really works nor do they want to learn, for if they did, they would then be too informed to be able to spout off with their false opinions. All government is bad, even the agencies that actually help help create jobs in the economy. It's much more fun & exciting to proclaim that the goverment has created a sinister tax scheme here to suppress the masses. Why are you trying to spoil their fantasy Walter?

Your assertions reflect a broad misunderstanding of how SBA works. The guaranty is a credit enhancement, not a loan. It is to encourage banks to extend credit to the riskiest sector of the economy, which is capitalized the thinnest, has less access to capital, and is more exposed to quick changes in economic conditions - but creates the most jobs.

In aggregate, these borrowers and lenders cover all the credit losses through a fairly stiff 'guaranty' fee (up to 3.75% of the loan), plus the lender pays an ongoing .5% of their revenues to maintain protection. You, my friend, pay nothing for these loans.

Not sure how many years you have been lending money to small business sector, but it's a little reckless to assume that everybody working for the SBA or government at large is 'incompetent' because they don't match your opinions.

And by the way, participating banks maintain plenty of risk on every deal, as well as being subject to having their guaranty revoked if they don't do their jobs responsibly.

You might be interested to reflect on the fact that it's probable that if you are a customer of one of the major banks in Tucson (BoA, Wells Fargo, US Bank, etc), they received many more times bailout capital from the federal government during the financial crises than it cost to run the SBA for an entire year. And to cite my friend Bob Coleman, SBA did not need a bailout.

Why should this individual not tap credit cards to start a business? Why shouldn't they save more? When did risk and sacrifice stop being required to start businesses?

Banks exist to make profits, if an entrepeneur can make a real business case for a loan they'll get one. If they are too high risk they need to step up and find alternatives. If they cant do that they or their idea isn't worthy.

And debt is a lousy way to start most businesses anyways, making it more accessible isn't going to create more "good" businesses, most of those can bootstrap, cheap loans open the doors to more marginal businesses.

I've helped start 3 firms, two ended up employing over 100 employees, the third 40, all right in the cross hairs of "small business", all without a dime from the SBA. The reality is good business ideas will get funded, and the SBA is an inefficient waste of resources that passes investment to a mixture of the connected, the . Unworthy, and the politically favored.

If truly we need to help fund minority and female run businesses, slash the SBA funding, dedicate alll remaining resources to minority owned businesses, and rename it The Minority Business Administration. But don't use that excuse to perpetually fund another large, wasteful, bureaucracy.

Business people can't complain about the US having the highest corporate tax rates in the world, and the massive surge in government spending that is destroying our children's future, then turn around and ask for our own handouts to be recycled through a makework web run by expensive federal employees. The vast majority of business owners understand this, the few who don't typically wet their beak on SBA largess, like the fellow I'm responding to here.

I'm starting another business now, and again I won't be asking for help. But I'll be paying for it, through my taxes..

EXCELLENT comments Brad! I agree completely. I would say that 90% of the information needed on an SBA deal is something a good C&I lender should get on ANY deal. Sloppy lenders and borrowers who trash the SBA need to educate themselves on what the real issues are. If you have a sound, adequately capitalized business with a good business model, you will find plenty of banks williing to lend you money right now. Don't blame your crummy business plan on the SBA! Also, SBA credit policy for the most part defaults to the bank's credit policy so if you have an issue there, talk to your bank. Lastly, borrower fees fund SBA administration expenses, NOT the tax payer.

Mr. Frick, your assertions are just not accurate. The SBA's relationship in the loan program is directly with LENDERS. They do not contact borrowers. EVERY bank requires annual financial information on all their commercial loans, with or without an SBA guaranty. Your misrepresentations of how these programs work perpetuates a ridiculous mythology about "paperwork" for guaranteed lending.

At one time my GM explored an SBA loan as a source of capital. It was a total waste of time, like dealing with the post office or IRS. Ultimately we found a private equity source.

We have seen many firms game the WBE/MBE/SBA/Government preferred vender schemes with two negative outcomes: substandard work by these firms and displacement of competent firms which didn't buy into in the boondoggle.

Small business doesn't need to be promoted, it needs the government to get out of the way, stop taxing us to death, and stop giving handouts to our competitors to help them recruit away our best employees.

Funding the worst businesses is like burning dollars to heat your office. The SBA is only efficient at political patronage. And your attempt at evasion by referencing clearly wrong headed subsidies of big business is a blatant admission that subsidies are wrong at the SBA as well.

You either believe that free enterprise/capitalism is the most efficient way to allocate capital, or you believe politicians using expensive bureaucrats to fund their favorite supporters and industries is somehow more economically sound. The second belief is called socialism. Not sure how well it's worked in the past, can you let us know?

As a follow up on Mr. Perrin's comment, and a somewhat rebuttal to Mr. MacLeod's comment, I want to address the SBA guaranteed loan program, not the 8(a) contractor program.

The reason that SBA and USDA guaranteed loans are attractive to banks is not because anyone makes money from SBA subsidies (other than the SBA employees obviously). It is becasue the bank can now make a loan that they probably wanted to make anyway, but they now can do it in such a way that the FDIC/OCC/OTS (pick your favorit letters from the alphabet soup) does not criticize the loan and force the bank to hold an inordinate reserve on that loan.

Anyone familiar with lending practices knows that if you make a loan, you hold back a portion of your capital in a loan loss reserve in case the loan goes bad. On a SBA or USDA loan, the bank's reserve is only based upon the unguaranteed portion of that loan (20-25% of the gross balance of the loan). This aides the economy as a whole by freeing up bank capital that can then be lent in the market to other qualified borrowers.

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